How Does a Self-Directed Health Savings Account Work?

People turn to self-direction these days because they want control. There is a certain security in making your own choices, especially when it comes to investing accounts. Self-directed health savings accounts (HSAs) give you control over your own investing decisions just like a self-directed IRA. And, yes, that means that you choose the assets for the account, not a broker or account custodian.

In short, here’s what a self-directed HSA can do for you.

One of the greatest benefits of HSAs is tax-free growth of the income on investments in the account.How Does a Self-Directed HSA Work So, if you self-direct the account and invest in things like real estate or private equity—things you know and understand—just imagine the potential growth that you could achieve to cover qualified health care costs for you and your family. If you meet the qualifications to open a health savings account, there are other advantages, too.

Additional benefits of HSAs:

  • Contributions are made with pre-tax dollars and are tax deductible
  • Unused funds roll over into next year’s funds
  • The interest earned in the account is not taxable
  • Accounts are offered by some employers, banks, insurance companies, etc.
  • If you change employers, your HSA follows you
  • Contribution limits rose for 2019 to $3500 for individuals and $7000 for families
  • Anyone can contribute: your employer, family member
  • Employer contributions are not counted towards your income
  • Self-directed HSAs can hold alternative investments, instead of stocks, bonds, and other traditional assets that the typical account is limited to

The only difference between a traditional HSA and a self-directed plan is that you choose the assets for the plan, not a third party.

Whether you choose to self-direct or not, these plans can significantly supplement retirement income provided you’ve amassed adequate funds in the HSA when you retire. If you experience a major, unexpected health issue you can use funds from that account instead of depleting your retirement funds. You can use HSA funds to pay for copayments, deductibles, coinsurance, along with other qualified health care expenses. Note: If you take the funds out for any other reason, you’ll incur penalties and face a tax liability.

However, once you are 65 years or older, you’re entitled to take penalty-free withdrawals and spend that on anything. Understandably, those withdrawals are taxable if the funds aren’t spent on qualified health care costs. But if the account holds substantial funds when you retire—some things outside the spending restrictions may very well be worth paying tax on!


If you are interested in learning more about self-directed health savings accounts, contact Advanta IRA today. We are always happy to explain how these plans can be incorporated into your investing and retirement planning strategy. Contact us by calling 800-425-0653 or via email.